SOUTHERN CROSS BUILDING SOCIETY V NW WANDEN HC WN CIV 2009-485-694

SOUTHERN CROSS BUILDING SOCIETY V NW WANDEN HC WN CIV 2009-485-694 16 July 2009IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2009-485-694BETWEEN SOUTHERN CROSS BUILDING SOCIETY Plaintiff AND NEIL WIN WANDEN Defendant Hearing: 7 July 2009 Appearances: R. Gordon and C. Craig - Counsel for Plaintiff I.J. Thain - Counsel for Defendant Judgment: 16 July 2009 at 3.30 pmJUDGMENT OF ASSOCIATE JUDGE D.I. GENDALLThis judgment was delivered by Associate Judge Gendall on 16 July 2009 at 3.30 p.m. pursuant to r 11.5 of the High Court Rules.Solicitors: Buddle Findlay, Solicitors, PO Box 2694, Wellington DLA Phillips Fox, Solicitors, PO Box 160, AucklandIntroduction[1] This is an application by the plaintiff, Southern Cross Building Society ("Southern Cross") seeking summary judgment against the defendant as guarantor of an unpaid loan owing to it by Glenstone Limited ("Glenstone"). The loan was secured by a first mortgage over a property owned by Glenstone. [2] The defendant opposes summary judgment on several grounds. First, he contends that Southern Cross, as mortgagee exercising its power of sale over a secured property, breached its duty under s 176 of the Property Law Act 2007 to take reasonable care to obtain the best price reasonably obtainable at the time of sale. Secondly, the defendant opposes summary judgment on the ground that there is an arguable case for the reopening of the loan and guarantee contract pursuant to s 120 of the Credit Contracts and Consumer Finance Act 2003, and thirdly, the defendant suggests that the quantum owing under the loan has not been property established by Southern Cross.Background Facts[3] The defendant is the sole director and shareholder of Glenstone. On 20 March 2008, Southern Cross and Glenstone entered into a term loan agreement ("the loan agreement") whereby a loan of $2,727,000.00 ("the loan") was advanced to Glenstone for a period of six months. The loan was to re-finance an existing term loan to Glenstone from Southern Cross. [4] Pursuant to clause 13 of the loan agreement, the defendant personally guaranteed the payment of all outstanding monies owing to Southern Cross by Glenstone. Security was provided by a first-ranking mortgage over vacant residential development land in Mt Eden, Auckland ("the property") owned by Glenstone. [5] Although the property had originally been acquired by Gladstone to undertake its own large-scale residential development, by 2008 the defendant as director of Glenstone had decided that the property should be sold rather than developed in order to repay the outstanding loan. In May 2008, the property was placed on the market for sale and Glenstone marketed it through the real estate agencies CBRE and Key2, but it did not sell.[6] The term of the loan expired on 20 September 2008. Glenstone failed to make repayment. Southern Cross states that neither Glenstone nor the defendant have made any interest payments on the loan following its expiry, and this is broadly undisputed. [7] In early October 2008, the defendant on behalf of Glenstone instructed a new real estate agency, Bayleys, to market the property. The defendant contends that this change was at the insistence of Southern Cross. Bayleys' professional recommendation to the defendant was set out in a memorandum dated 14 October 2008, and was to the effect that the sale take place by public tender. Bayley's also recommended a sales strategy and marketing campaign. There were apparently no live offers on the table before 14 October 2008 but nevertheless the former agents CBRE and Key2 were incorporated into the tender process. The defendant accepted Bayleys' proposal on that day 14 October 2008. [8] On 23 October 2008 default notices under s 119 and 122 of the Property Law Act 2007 were served on Glenstone and the defendant. The notices required remedy of the loan defaults by 1 December 2008, failing which it was noted that: (a) All amounts due under the loan agreement would become immediately due and payable in full (to the extent to which they had not already); (b)Southern Cross would have to right to enter into possession of the property; and/or (c) Southern Cross would have the right to sell the property. [9] In the meantime, the Bayleys tender process continued, alongside the ongoing sales efforts of CBRE and Key2. The tender closed on 27 November 2008. Only one tender was received. It was an offer of $2.3 million, conditional upon the tenderer being satisfied to proceed with the purchase after undertaking due diligence. I note there are some discrepancies in the evidence as to whether the offer was $2.3 or $2.4 million, but nothing really turns on this. The offer however in any event was not acceptable to the defendant and thus Glenstone. The defendant said he wanted a higher price.[10] Post-tender, Bayleys, CBRE, and Key2 went back to the previously interested parties to advise them that the property had not been sold, and to ask them to reconsider and make new offers. This process resulted in one offer being made. It was an offer by L&Y Holdings Limited ("L&Y") for $2 million, which was later negotiated up to $2.1 million. This offer was also rejected at the time as the defendant said it was unacceptable as he wanted a higher price. [11] On 14 December 2008, the defendant advised Bayleys to put a counter-offer of $2.95 million to L&Y. This was done according to the affidavit of Mr. Cameron Melhuish dated 29 June 2009 (paras. 32 and 33) but the counter-offer was rejected, accompanied by an indication that L&Y would withdraw its earlier $2.1 million offer. Then, it appears that on 22 December 2008 L & Y's solicitors were informed of Glenstone's default under its mortgage and that Southern Cross in exercising its power of sale "in principle" was prepared to accept L&Y's earlier offer to buy the property at $2.1 million plus GST. [12] Recapping for a moment, the Property Law Act notices served on Glenstone and the defendant, had not been complied with by 1 December 2008. At that point Southern Cross had a power of sale over the property under its mortgage. On 19 December 2008 it had formally advised that it was exercising this power of sale. Around this time, however, the defendant was still unwilling to accept the only available offer for the property of $2.1 million from L&Y and he had made this clear to all concerned. He apparently wanted to keep trying for a higher price or to look at other alternatives such as a trade swap deal. A trade swap was unacceptable to Southern Cross however as it would have required further financing of Glenstone. The differing positions of Southern Cross and the defendant on the matter are captured in an email from Southern Cross' solicitors to the defendant's solicitors dated 16 December 2008:"In your email of 12 December 2008 you referred to: 1. A trade swap – that is not a proposition that is likely to be acceptable to Southern Cross Building Society – the property will have a current market value and it is Southern Cross Building Society's view that it is in the order of $2.1M plus GST, the subject of the present offer; and2. Your client's endeavours to get a sale that most closely approximates the amounts outstanding is not relevant – the secured property has a current market value [and] if not sold by the mortgagor, then Southern Cross Building Society willproceed to a mortgagee sale and will achieve, in accordance with its statutory duty, the current market value. There is no basis to suggest that that will be the close of the total amount owing which is presently $2,831,779.61 plus interest continues to accrue".[13] Late on 19 December 2008, as I have noted, the defendant and his solicitors were advised that Southern Cross was exercising its power of sale, under the mortgage. From this point, Southern Cross carried out its own negotiations with L&Y. An agreement in principle was reached late in December 2008, and a final agreement for sale and purchase concluded on 11 March 2009. This was at a price of $2.1 million plus GST with settlement scheduled for 31 July 2009.Summary Judgment Principles[14] Rule 12.2 of the High Court Rules provides as relevant:"12.2 Judgment when there is no defence or when no cause of action can succeed(1) The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to [a cause of action in the statement of claim or to a particular part of any such cause of action].[15] The principles applying to summary judgment applications are well- established and they have been recently summarised by the Court of Appeal inKrukziener v Hanover Finance Ltd [2008] NZCA 187:"[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1; (1986) 1 PRNZ 183 (CA), at p 3; p 185. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart(1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331; [1979] 3 WLR 373 (PC), at p 341; p 381. In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA)."Mortgagee's Duty of Reasonable Care[16] Section 176 of the Property Law Act 2007 provides as relevant:"176 Duty of mortgagee exercising power of sale(1) A mortgagee who exercises a power to sell mortgaged property, including exercise of the power through the Registrar under section 187, or through a court undersection 200, owes a duty of reasonable care to the following persons to obtain the best price reasonably obtainable as at the time of sale: (a) the current mortgagor: (b) any former mortgagor: (c) any covenantor: (d) any mortgagee under a subsequent mortgage: (e) any holder of any other subsequent encumbrance.[17] Plainly there is nothing inherently unreasonable in a mortgagee's exercise of a power of sale, which is its contractual right and a principal remedy on a borrower's default under its mortgage: Taylor v Westpac Banking Corporation(1996) 5 NZBLC 104,104, 104, 107-8 (CA). It does not necessarily follow from the duty that the best price reasonably obtainable will actually be achieved: Agio Trustees Co Ltd v Harts Contributory Mortgages Nominee Co Ltd (2001) 4 NZ ConvC 193,480, para 70. The duty does not qualify the mortgagee's right to decide if and/or when to sell, and there is no obligation on a mortgagee to postpone a sale in the hope of obtaining a better price later: Agio Trustees Co Ltd v Harts Contributory Mortgages Nominee Co Ltd, para 70; Downsview Nominees Ltd v First City Corporation Ltd [1993] 1 NZLR 513; Harts Contributory Mortgages Nominee Co Limited v Bryers HC AK CP403-IM/00 19 December 2001, para 43(e). [18] In the present case, Southern Cross decided to exercise its power of sale in December 2008. However, the relevant time for exercising reasonable care to obtain the best price reasonably obtainable for the property was at the time of sale. This was on 11 March 2009 when the sale contract with L&Y was concluded. Counsel for the defendant contends that the marketing campaign for the property had finished in December 2008. At that time, L&Y was clearly identified as a potential buyer. Counsel argues that since this date, Southern Cross undertook no active marketing of the property at all, but had limited itself to negotiating with a single party – L&Y. Throughout these negotiations, it is suggested that Southern Cross resigned itself to obtaining no more than $2.1 million for the property – in the more than three month period before the final agreement was reached, L&Y attempted to negotiate down the price, but there is no evidence that Southern Cross ever attempted to raise the price. [19] Before me counsel for the defendant also placed reliance on the earlier tender received for the property at $2.3 million (or $2.4 million). Mr. Thain for the defendant notes that Southern Cross counters that the offer was effectively rejected by the defendant, but he maintains nevertheless that Southern Cross should haveattempted to renew the offer after it stepped in. Mr. Thain contends that there is no evidence before the Court of what happened to this offer. The defendant further alleges that other indications of interest for the property and indications as to its value were effectively ignored by Southern Cross. It is argued that these factors, together with the absence of any active marketing between December 2008 and the date the final sale agreement was entered into in March 2009, amount to a failure by Southern Cross to maximise the chances of creating any competition for L&Y. [20] In addition, Mr. Thain contended before me that Southern Cross also had not obtained a valuation of the property as at March 2009, and had not actively tested the market in any real sense at this time. He argued that Southern Cross was obliged to take these steps, and that by failing to do so, Southern Cross had failed to take reasonable care to obtain the best price reasonably available as at the time the property was eventually sold. [21] On top of this failure to test the market in March 2009, Mr. Thain also suggested that Southern Cross may have been in further breach of its duty by relying on the earlier marketing campaign undertaken by the defendant and Glenstone, in light of apparent flaws in that process. Although the defendant himself agreed to Bayleys' marketing and tender plan, he now makes some suggestion that this may have been done under pressure. His counsel further pointed to evidence that the defendant's own unwillingness to accept offers in the low $2 million range could have prevented a beneficial competition between prospective purchasers developing. In light of that, he suggests it may not have been safe for Southern Cross to rely on the defendant's marketing efforts here. [22] Counsel says it is also arguable that had Southern Cross taken such reasonable care, it may have obtained more than $2.1 million for the property, and indeed may even have obtained sufficient funds to extinguish the defendant's entire guaranteed debt. In support of this proposition, counsel pointed to L&Y's earlier indications of a value above $2.1 million; the earlier tenderer's offer of $2.3 million (or $2.4 million); the valuation before the Court obtained by the defendant of registered valuer Edward Arthur Bell ("Mr. Bell") as at 28 May 2009 for $2.9 million; and a recent offer of $1.4 million for approximately half the property, also exhibited by the defendant to his second affidavit.[23] In response, for Southern Cross, it is submitted that in a case such as this, where there was independent professional advice on a marketing campaign, and an orthodox sales process adopted, the Court should not second guess the sales course adopted: Taylor v Westpac Banking Corporation; Schollum v Graham CA30/97 5 May 1998. Mr. Gordon for Southern Cross before me noted also that, in the absence of bad faith, a mortgagee shares with a mortgagor and guarantor an incentive to maximise the price obtained on a forced sale. [24] Here, Southern Cross rejects the suggestion that they had an obligation to retest the market in March 2009, and questions the value and validity of the evidence said to support this proposition. Schollum v Graham was pointed to as support for the proposition that the mortgagee has no obligation to retest the market. In that case, Doogue J stated at pg 8:"A further problem for the appellant is that there was no evidence whatever before the trial Judge that more advertising and an auction as proposed by the appellant would have been reasonably likely to achieve a higher price than that obtained by the respondent, particularly if regard were had for the additional costs that would be incurred and that the sale would be a mortgagee sale after two previous extensive campaigns when large initial interest had faded away and there was limited interest with a level of offers of the order of that accepted by the respondent. The appellant was asking the Judge and this Court to speculate that a different course would have produced a better sale but there is no evidence to support the assertion. It is equally likely the result would have been worse.[25] The facts of Schollum v Graham are similar to this case. The mortgagee had sold the property without re-marketing it, following unsuccessful marketing campaigns by the mortgagor. The conduct of the mortgagor's marketing campaigns and the mortgagee's method of sale were both criticised. However, as counsel for the defendant pointed out, that case was an appeal from the decision of the trial judge, who had the opportunity to hear all the evidence and assess the witnesses. The Court of Appeal was unwilling to overturn the trial judge's finding, after viewing the evidence, that the mortgagee had not breached his duty. In comparison, the application before me is one for summary judgment, where the Court must be satisfied that the defendant has no arguable defence before finding for Southern Cross. Mr. Thwain for the defendant submitted also that the decision in Schollum v Graham turns heavily on its own facts, and that the defendant should be entitled to put all the evidence in this case before the Court to be properly tested at trial.[26] Regarding Mr Bell's valuation, Southern Cross states that, particularly in volatile market conditions, it is too late to be of relevance here. It was also not prepared on a forced sale basis, although on this point Mr Bell claims that the difference in value may not be significant. Issue was also raised with the number and comparability of the comparative properties used by Mr. Bell. These concerns aside, it was submitted for Southern Cross that such valuations are of limited relevance, because in some situations, a lower "forced sale" value will still be the best price reasonably obtainable. On this, Southern Cross relies on Westpac Banking Corporation v Chisholm HC AK CIV-2006-404-3230 27 April 2007, where Doogue AJ stated:"[26] To establish that the agent in this case set out to undermine the sale process and that the bank breached its obligation to take reasonable care to obtain the best price, would require some actual evidence that that is what occurred. That is, even if there was probative evidence establishing that the agent acted fraudulently vis-à-vis the bank which had engaged him/her, there would need to be some evidence that the bank ought to have known that was likely to happen or that it affirmatively encouraged the real estate agent to act in that way. [27] The defendant attempted to show that there was a sale at such gross undervalue as to give rise to a suspicion that the mortgagee breached its duty. But all he has established is that there was a sale at less than the market value as the valuers assessed it to be. Realisation of the price at a discount to market value on its own proves nothing. Such a discount is exactly what one would expect where a forced sale takes place. There is no evidence that the degree of discount to market value that the valuers estimated was so great as to go beyond the normally expected level of reduction in the sale price."[27] As to both the suggestion that it was not sufficient here in March 2009 to rely on the earlier marketing campaign undertaken by Bayleys and the suggestion that the campaign itself may have been flawed, Mr. Gordon for Southern Cross submits that the evidence of the extensive steps taken by Bayleys in marketing the property is unequivocal. It is not disputed that Bayleys' provided a professional opinion to the defendant as to the appropriate methodology for the sale, and a proposed marketing programme tailored to the property to take place over five weeks. Bayleys' followed through on this advice at the instruction of the defendant. Bayleys, together with CBRE and Key2 continued their efforts to market the property post-tender, resulting in the offer from L&Y. The submission was made that sale by tender is an orthodox and transparent process, and that on any objective view the sales campaign could not be criticised. Southern Cross suggests that thedefendant's real issue lies in the fact that the property was facing a very difficult sale market at the time and not the quality of the marketing efforts undertaken. [28] As to the suggestion advanced for the defendant that there is no evidence of what happened to the earlier $2.3 million (or $2.4 million) offer, and that Southern Cross should have made contact with the offeror as that offer had been rejected perhaps unwisely by the defendant, Mr. Gordon pointed to the evidence in the defendant's own affidavit that the offeror in fact withdrew the offer – it appears to have been ultimately taken off the table by the offeror, not by the defendant. [29] Before me, Mr. Thain for the defendant pointed to a number of offers and valuations from various dates as evidence that the $2.1 million ultimately accepted was not the best price reasonably obtainable. However, Mr. Gordon contends that all of this evidence is of dubious value. The recent offer annexed to the defendant's affidavit of $1.4 million for a 2000 square metre part of the 4558 square metre property relies on a number of quite difficult contractual conditions being satisfied over a period of time and requires the property to be subdivided. It is clear also that a mortgagee has no obligation to break a property up and sell it in pieces: Harts Contributory Mortgages Nominee Co Limited v Bryers, para 43(e). But in response, Mr. Thain does suggest that this offer was not exhibited to require Southern Cross to enter into this particular agreement, or one like it, but simply to evidence what he contends is the likelihood that a higher value than $2.1 million could have been obtained. [30] And, there is a reasonable argument too that the other offers and valuations referred to by the defendant in his first affidavit may fail to take account of what was suggested to be a significantly worsening property market. In addition, many of the offers were not cash offers but involved significant value being attributed to trade swaps with ongoing financing of Glenstone being required. [31] As such, Southern Cross argues that the market had been fully tested. There had been extensive marketing of the property in 2008 before Bayleys was retained. Bayleys had run a public tender and an extensive marketing campaign which realised one tender which fell through. Post-tender efforts uncovered only one offer. Predictions were that the property market generally was getting significantly worse,not better. Viewed in this context, Southern Cross argues that deciding to focus on holding together the L&Y deal was far from a breach of their mortgagee's duty. [32] At this point, the evidence before me would seem to suggest that Southern Cross acted reasonably and fulfilled their duty under s 176. However, in the circumstances of this case, whether or not the decision not to re-test the market in March 2009 was reasonable is an intensely factual question, which it would not be suitable to dismiss in summary judgment. As to this, I bear in mind that the plaintiff acknowledges that it had undertaken no active marketing of the property at all and that at the time of sale over three months had passed since the mortgagor's own marketing campaign had finished. And the defendant maintains that from December 2008 onward the plaintiff had been resigned to obtaining no more than $2.1 million for the property (and indeed the plaintiff had begun its sale negotiations with L&Y by offering to accept $2.1 million). Again, there seems little dispute as to this aspect. One final matter is the valuation of Mr. Bell, the defendant's registered valuer at $2.9 million, a valuation for which the only major issue taken by the plaintiff is recorded in the comments of Mr. Cameron Melhuish, (albeit a registered valuer himself) who was the Bayleys agent who negotiated the sale for the plaintiff. [33] Given the state of the residential development property market at the time, the particular nature of the property itself and the intense recent (unsuccessful) campaigns to achieve a sale, it is likely in my view that when all the evidence is heard and tested Southern Cross will be seen to have acted entirely reasonably in focusing on holding together the L&Y offer here. [34] But, I remind myself that the application before me is one for summary judgment upon which Southern Cross has the onus to satisfy the Court that the defendant has no defence to its claim. By a fine margin, I must conclude that Southern Cross has not done enough here to show that its case is unanswerable.Oppression[35] Section 120 of the Credit Contracts and Consumer Finance Act 2003 ("CCCFA") provides as relevant:"120 Reopening of credit contracts, consumer leases, and buy-back transactionsThe Court may reopen a credit contract, a consumer lease, or a buy-back transaction if, in any proceedings (whether or not brought under this Act), it considers that— (a) the contract, lease, or transaction is oppressive; or (b) a party has exercised, or intends to exercise, a right or power conferred by the contract, lease, or transaction in an oppressive manner; or (c) a party has induced another party to enter into the contract, lease, or transaction by oppressive means."[36] "Oppressive" is defined in s 118 as follows:"118 Meaning of oppressiveIn this Act, oppressive means oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice."[37] In the delay between the time that the original loan had been due, and the new loan documentation executed, the defendant contends that he was charged $24,173.58 in penalty interest. He argues that this delay was caused by Southern Cross, and that he should not be responsible for it. He further states that an employee of Southern Cross informed him not to make any deposits over this time. [38] The defendant also maintains that Southern Cross never expressly advised either he or Glenstone that it was stepping in to exercise its right of sale, and engaging Bayleys as its agent to the exclusion of Glenstone and himself. This assertion was disputed by counsel for Southern Cross, who pointed to correspondence dated 19 December 2008 from Southern Cross' solicitors indicating that both the defendant and his solicitors had been informed that Southern Cross was "likely" to exercise its power of sale that afternoon. [39] On the basis of these two allegations, counsel for the defendant endeavours to suggest that it is arguable that Southern Cross breached reasonable standards of commercial practice pursuant to s 120 of the CCCFA. Although at this point, these arguments would seem to lack a great deal of substance, it is suggested that Southern Cross has failed to show that the defendant has no arguable defence in this regard. Given my earlier findings at para. [34] above, I need say nothing further on this aspect however.Quantum Issue[40] On this, the defendant points to a payment of $27,000.00 which was made by him on behalf of Glenstone to Southern Cross on 19 September 2008. Thispayment was apparently to cover interest due for the month of October 2008. The defendant alleges that Southern Cross failed to draw the funds from the deposit account to pay the interest payment. As such, it is claimed that default interest for that month was wrongly charged and compounded, and that the $27,000.00 payment is still unaccounted for. To this rather limited extent, this may bring the quantum claimed by Southern Cross into question. On the material presently before the Court, this issue was not fully answered by Southern Cross, and so it may remain an arguable defence in response to a very small proportion of the amount sought. And, on this quantum issue, I leave to one side questions as to whether the open offer made on 16 December 2008 by Southern Cross' solicitors in a letter to the defendant's solicitors to right off $200,000.00 of the defendant's guarantee debt on certain conditions, has any relevance here. [41] For completeness, I also note that before me counsel for the defendant requested that I take into account the fact that granting summary judgment here would inevitably lead to the defendant's bankruptcy, and effectively prevent him from pursuing claims against Bayleys. I do not see that this is necessarily the case or that, in any event, these matters are of any relevance to the present application for summary judgment.Result[42] For the reasons I have outlined above, the plaintiff's application for summary judgment against the defendant is dismissed. [43] Costs on this application are reserved.'Associate Judge D.I. Gendall'